Banks not rushing to tap loan fund

BankNewport is saying thanks but no thanks to the federal government. And they’re not the only ones.
Numerous community banks across Rhode Island and southeastern Massachusetts say they will not be taking part in the U.S. Treasury’s new $30 billion program that is intended to get more loans into the hands of business.
Under the Small Business Lending Fund, the government would buy preferred stock in both publicly traded and privately held banks in exchange for a cash infusion that then would be lent to small businesses.
The problem, many local banks say: They already have plenty of money on hand to lend. What they don’t have is heavy loan demand because many solid businesses still are skittish about adding to their debt in uncertain times.
“We don’t need the fund, to be truthful,” said Leland Merrill, senior vice president and manager of BankNewport’s commercial-lending group. “It’s not like there are borrowers coming looking for credit and we don’t have the money to loan to them. We have plenty of money to loan.”
Some bankers say this new government fund – part of the Small Business Jobs Act of 2010 signed into law last fall – looks and sounds too much like the much-maligned Troubled Asset Relief Program, otherwise known as TARP.
And they say they don’t want to be tarred with another “bailout” tag.
Mark Meiklejohn, chief lending officer at Bank Rhode Island, said the experience with TARP “left a bad taste in [lenders’] mouths” because stipulations and restrictions changed after the cash was distributed.
While BankRI is open to examining the terms of the Small Business Lending Fund, Meiklejohn doesn’t see the bank jumping on board.
“I think a lot of folks are going to be scared of that program because it reminds them of TARP a little bit,” he said. “I know the parameters are different, but the fact is that the rules changed … in midstream before.”
Not everyone feels the same way.
Independence Bank, the one-branch outfit in East Greenwich, already tapped into TARP’s Capital Purchase Program for $1 million but is now looking to refinance using the new fund.
Robert Catanzaro, Independence’s president, said his bank can leverage the money to make more business loans.
And they’re eager to apply at Coastway Community Bank in Cranston. “We’ve done financial modeling that says when we put [the additional money] out there, we can make good use of it,” said William White, Coastway’s president. “I can’t speak for [other banks], but I can tell you we’d be excited to be able to get the money. It would mean good things not only for Coastway but for everyone who’s a recipient and the jobs the money creates.”
“We already have plenty of liquidity, but there’s always room for more at the table,” he said.
For its part, the U.S. Treasury says the new Small Business Lending Fund differs from TARP in several ways. Eligibility for the cash infusion will be based on a bank’s performance, and it will only be available to smaller lenders.
Banks with less than $1 billion in assets would be eligible to receive up to 5 percent of their risk-weighted assets. Those with less than $10 billion can tap into the fund for up to 3 percent.
Those terms exclude Rhode Island’s biggest lenders, Bank of America and Citizens Bank, as well as regional player Webster Bank.
Participating banks would begin paying the government a dividend rate of 5 percent on the preferred shares given to the Treasury, but that could drop as low as 1 percent if the bank increases its small-business lending.
The Treasury is already accepting applications. Spokeswoman Colleen Murray said recently that Treasury officials have seen “very strong interest,” but she could not give the number of applications received. The deadline to apply is March 31.
David Floreen, senior vice president of government affairs for the Massachusetts Bankers Association, said the group has scheduled a bankers-only session this month to familiarize its members on the terms of the program.
The association hasn’t polled its member banks on their interest in the $30 billion fund, but when told many banks have expressed no desire to participate, Floreen said he wasn’t surprised.
“Most of the banks in Massachusetts and New England have plenty of liquidity,” he said.
That’s the story at Bristol County Savings Bank, according to Patrick Murray Jr., the bank’s executive vice president and chief operating officer.
“We’ve got money to lend,” said Murray, whose Taunton-based bank has a branch in Pawtucket. “It’s a message we’ve been trying to get out through this whole crisis. The community banks have the money to lend; it’s just that there’s no demand.” Recent growth in the bank’s small-business loan portfolio “has been taking business from other banks,” he added. “There’s not a lot of new stuff out there. I think people are still a little bit leery to put new inventory on the shelves or expand their building.”
Then why is there talk of businesses having difficulty getting access to capital?
“We have not turned away good credit throughout this entire recession,” said Merrill, from BankNewport. “That has not been the issue.”
Part of the problem is that, before the economic downturn, many lenders were lax about who they let borrow “and those [creditors] and businesses came to expect it,” Merrill said. “But what you’ve seen is banks have been going back to the way they used to be, which is lending on sound underwriting practices.”
Murray said the government might be better off expanding the loan guarantees offered by the U.S. Small Business Administration.
“That way the SBA picks up some of the credit risk, so if you do have startup companies or those that have struggled, the risk is shared with the government,” he said.
As it stands, the money available through the Small Business Lending Fund isn’t much of a bargain, according to some bankers.
“Five percent is a lot of money to pay considering where the markets are today,” Murray said. “First, we don’t need the capital, and we can get cheaper capital at this point.”
Merrill agreed. “We have plenty of borrowing capacity from sources like the Federal Home Loan Bank of Boston that quite honestly would be a much-less-expensive cost of funds than what they have [for the new Small Business Lending Fund].”
Coastway’s White sees it differently.
Projections show the cash infusion will allow Coastway to ramp up its lending, which will lead dividends to the government to drop to 1 percent “very soon after receiving the money,” White said.
“It’s a matter of loan demand,” he added. “We have tremendous loan demand right now. I have every confidence that if that money comes to Coastway, we’re going to be able to put that money out there in spades.
“I don’t need the capital, but when we have the demand we have, we’re making a business decision to step forward and say, ‘Give it to us, and we’ll put it to work.’ ” &#8226